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Tuesday, January 25, 2011

Onmobile uses 2 yr payback period to guide capex

Onmobile is India's first(and biggest) Mobile VAS operator. During the 2Q'11 conference call(transcript available here), an analyst quizzed the CEO about the 'commercial visibility' of development expenditure. The CEO, instead of stating NPV/IRR etc stated that the payback period is used. To quote him
when we do our internal business planning and our ROIC and all the analysis, investing in a product, we feel relatively comfortable after doing all the haircuts, making the necessary adjustments and reselling it to customers that we will be able to recover the investment capital well before two years. That’s the sort of the thumb rule that we use.
As conventional finance theory goes, this decision to use payback period over NPV is not that surprising, given the high risk in the VAS industry. After all, it is the VAS player(like Onmobile) who invests upfront in 'developing' an application and then resells it to the telecom company/media house. Given the dynamic consumer preferences, such a strategy may prove risky, and so the 2 yr rule allows Margin of Safety

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